Category Archives: Investing Money

Investment Returns Will Shrink

My Comments: Putting money to work for the future is something we all try to do. Our expectations vary all over the map. If you use the past to predict the future, you’re probably going to be disappointed.

This is very relevant if we have money sitting somewhere that we plan to use tomorrow to support our standard of living.

If we’ve stopped working for a living, our only recurring income comes from Social Security, pensions, and whatever money we’ve saved. All of which makes it imperative we find a way to manage financial risk going forward.

by Dr. Bill Conerly, August 5, 2017

What will an investment portfolio earn over the long term? That issue is important to individual investors, state pension agencies and corporations offering defined benefit pensions. State pension agencies have been lowering their assumed returns. A decade ago, 8.0 percent was the dominant assumption, with some states higher and some lower. Now the most common assumption is between 7.0 and 7.5 percent. The sub-seven assumption was never used as recently as 2011 but is now embraced by several pension authorities.

What assumption should a family, a government agency or a corporate pension fund use? For a long time, it’s been best to go back to the long-term averages, but the current outlook is less rosy. I personally have revised down the estimate I use in planning the Conerly family’s spending and saving, and I concur with public bodies who do the same. I’m not fully convinced that I’m right; I just think the pain from erring on the low side will be less than the pain of erring on the high side.

The traditional approach is to look at long-run returns, and the book of numbers for that analysis is the SBBI Yearbook covering stocks, bonds, bills and inflation (hence the SBBI name). This research is based on pioneering work done by Roger Ibbotson and Rex Sinquefield.

Since 1926, when their dataset begins, U.S. common stocks have rewarded investors by 10 percent per year, counting capital gains and dividends, before taxes. Corporate bond returns averaged 5.6 percent returns. An investment portfolio split 50 percent in stocks (the Standard and Poor’s 500) and 50 percent in corporate bonds would have earned 8.3 percent per year over 1926-2016. That justifies a long-run expected return around 8.0 percent as was common.

But don’t stop reading yet! Remember two important points. First, past returns are not guaranteed in the future. Second, even if the past points the way to the future, the past includes whole decades with negative returns to stocks, albeit just slightly negative.

On the first point, the structure of the economy has changed substantially since 1925 when the good data begin. Jeremy Siegel in his book, Stocks for the Long Run, shows stock market data back to 1802. He finds a seven percent annual return from 1802 through 1925. This suggests that we cannot take investment returns fixed in stone; they can be higher or lower over long periods. (Siegel’s book is one of my top two picks for the average person making investment decisions. The other is Burton Malkiel’s A Random Walk Down Wall Street.)

Stock market returns have been pretty good recently. Look at the S&P 500 since 2012 (counting capital gains and dividends, before taxes):
2012 +16%
2013 +32%
2014 +14%
2015 +1%
2016 +12%

But high returns can be due to overly optimistic speculators rather than economic fundamentals. We know that economic growth has been below normal in recent years. We also know that interest rates have been well below long-run averages. That suggests – but does not prove – that returns on capital are lower now than in the historic average.

Low returns on capital might trigger a stock market gain in the short run, as lower interest expense makes corporate profitability look better. But in the long run, stock market returns must reflect the returns of investing capital in a business. So if low corporate bond interest rates today reflect low returns on capital, then stock market returns should be low in the future.

The story for low returns on capital now is simple: much of our new production requires very little capital. A steel mill or car factory requires lots of capital. A Google or Facebook requires far less. With less need for capital, the owners of capital will earn lower returns. And the global supply of savings is rising, partly due to aging baby boomers around the world and partly because a larger share of world income is in countries with weak social safety nets. I provided more detail in “Returns on Capital – And Interest Rates – Will Be Low In The Future.”

The second caution mentioned above is the tremendous variability of returns. The long-run average for stocks may be ten percent, but the entire decades of the 1930s and the 2010s had negative returns. An investor ended a ten-year period with fewer dollars than at the beginning. And don’t forget the spectacularly bad years: 1931, -43 percent, and 2008, -37 percent.

The long-run average tells you little about next year’s return. If the next bad decade starts just as you retire, you may feel pretty uncomfortable waiting for the long-run average to return. And if you can’t stomach the occasional bad year, then you’re likely to shift into a low-return investment when the stock market rebounds.

If I have to make a best guess as to how the next 100 years will look, I roll with the long-term average and say that stocks will return about ten percent. But I have arranged my personal affairs so that long-run returns can be much lower and I’ll still be able to eat.

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Wall Street is sending huge warning signs for stocks

My Comments: Sooner or later, the penny will drop.

Joe Ciolli \ Jul 30, 2017

To a growing chorus of strategists and investors across Wall Street, the stock market looks like it’s headed for a rude awakening.

Their mounting pessimism comes at a time when US equities are looking healthy, at least on the surface. Major indexes are hovering near record highs they reached this past week, while corporate earnings are growing at a blistering pace.

Yet some market experts think this apparent strength is just masking deeper problems brewing under the surface.

Count Marko Kolanovic, JPMorgan’s global head of quantitative and derivatives strategy, as one of those stressing caution. In a client note on Thursday, he said that record-low volatility should “give pause to equity managers.” Kolanovic even went as far as to compare the strategies that are suppressing price swings to the conditions leading up to the 1987 stock market crash.

“The fact that we had many volatility cycles since 1983, and are now at all-time lows in volatility, indicates that we may be very close to the turning point,” he said.

A sudden move down in US stocks on Thursday — including a notably outsized loss in tech — was widely attributed to Kolanovic’s note, highlighting just how seriously many investors have started taking such warnings.

His consternation extends into the hedge fund world, where investment managers are also crying foul about low volatility to anyone that will listen.

Baupost Group, a $30 billion fund, recently highlighted the lack of price swings as a harbinger of pain to come, calling it a possible “accelerant for the next financial crisis.” Meanwhile, Highfields Capital Management, which oversees $13 billion, said this past week that low volatility is giving people the false impression that the market is risk-free.

Going beyond the much-maligned low-volatility environment, Bank of America Merrill Lynch has its own reasons for expecting an upcoming rough patch in stocks — one it sees coming sometime this autumn.

Michael Hartnett, the chief investment strategist of BAML Global Research, points to how the S&P 500 has continued climbing to new highs, even as the size of the Federal Reserve’s balance sheet has stayed relatively unchanged. He says this divergence is a “classic euphoria signal.” Such overexuberance has historically been a sign that investment sentiment is overextended.

Legendary investor Byron Wien, who currently serves as vice chairman of Blackstone’s private wealth solutions group, agrees with BAML. He sees the stock market outpacing the Fed’s balance sheet as problematic and called the development “disturbing” in a July 26 client note.

BAML also points to record low private client cash levels as a sign that the stock market may be close to maxing out. With investors looking fully invested, there’s limited dry powder for them to put to work in the market, should they feel inclined to add to positions.

And, perhaps most importantly to BAML’s call for a market top this autumn, a proprietary indicator maintained by the firm sits on the brink of reaching a sell signal. It’s put together a list of things that need to happen for the market to peak in August:
• The dollar index falls to 90, coinciding with “unambiguous” US labor/consumer weakness (non-farm payrolls lower than 100,000) and a flatter yield curve
• The end of high-yield leadership, which “should be an early warning system”
• Fatigue in equity growth leadership, in areas like the Nasdaq Internet Index, emerging markets Internet, and semiconductors

But, amid the growing pessimism, there are still strategists on Wall Street who see the S&P 500 hanging in there, at least through the end of 2017. A survey of 20 chief equity strategists conducted by Bloomberg shows an average year-end forecast of 2,439, basically unchanged from Friday’s close.

So while it’s anyone’s guess what will transpire in the coming months, it’s good to at least be aware of the cracks forming in the market’s foundation. And don’t say you weren’t warned.

How do I safely invest my retirement savings for growth?

My Comments: Financial illiteracy is a huge problem. But many people have no idea it applies to them.

The other day I was trying to explain something to a widow in her 70’s and it was like talking to my six year old grandson.

People should be exposed to the markets. But they need to shift some of the risk associated with the stock and bond markets to an insurance company. Over the next 10 – 20 years they’ll have a better overall rate of return without the headaches. There is a way to remain invested and not be exposed to all the risk. But you have to be careful about the fees. Send me your email (see Contact Info above) and I’ll explain further.

by Walter Updegrave/May 30, 2017

I have a retired friend who knows he needs growth to ensure his nest egg will last throughout retirement, but at the same time is nervous about the investing in the stock market. Any advice for how he should invest?–D.F.

First, let me say that I don’t blame you (I mean your friend) for being skittish. Even though stock prices have more than tripled after bottoming out in the wake of the financial crisis a little more than eight years ago and now stand at or near record highs, there’s that nagging concern in the back of many investors’ minds that the market could suddenly reverse course and we could be looking at another major selloff and a prolonged slump.

And, of course, at some point that will happen, as it has many times before. We just don’t know when or what will trigger the downturn. So the question is how do we invest our nest egg so we can take advantage of stocks’ potential for long-term growth without leaving ourselves too vulnerable to devastating setbacks that could jeopardize our retirement security?

The answer comes down to balance. But not just balance in an investing sense, or creating an investing strategy that reflects an acceptable tradeoff between risk and reward. I’m talking about balance in an emotional sense too, achieving a level of equanimity that helps us keep our composure when the markets are in turmoil, so we don’t do something we’ll later regret, like selling stocks in a panic at depressed prices.

The first step toward achieving investing balance is to build a portfolio of stocks and bonds that can generate acceptable returns while also providing reasonable downside protection. For help in creating such a stocks-bonds mix, you can go to Vanguard’s free risk tolerance-asset allocation tool.

The tool will also give you a sense of how such a blend of stocks and bonds has performed in the past, and you can also see how many years the various portfolios have suffered a loss and how each has performed on average over many decades.

You shouldn’t think of this as any sort of guarantee of how a given combination of stocks and bonds will fare in the future. If anything, many pros believe average returns going ahead for both stocks and bonds will be considerably lower than in the past. But at least you’ll have a good idea of how different mixes have behaved under a variety of market conditions.

In your zeal to protect yourself against setbacks, however, you don’t want to end up with a mix that’s so wimpy that you run a high risk of running through your nest egg too soon. So to get a sense of whether your recommended mix of stocks and bonds will be able to support the type of spending you envision during a retirement that could very well last 30 or more years, I suggest you also go to this retirement income calculator.

(The tool assumes you’ll live to age 95, which I think is a reasonable assumption for planning purposes. But if you’d like to see how long you might be around based on your age and health status, you can check out the Actuaries Longevity Illustrator.)

The calculator will estimate the chances that you’ll be able to maintain your planned level of withdrawals from your nest egg. If that probability is lower than you’d like — as a general rule, I’d say you’d like to see an estimated success rate of 80% or more, give or take — then you can re-run the numbers with different asset mixes and different withdrawal rates.

In general, though, as long as you keep your initial withdrawal rate within a range of 3% to 4% or so, you should be able to have decent assurance that your nest egg will support you at least 30 years. You can go with a higher withdrawal rate, but you’ll find that the chances of your money lasting throughout a long retirement start to drop off pretty quickly as you push your withdrawal rate above that range.

Once you’ve settled on an asset mix and withdrawal rate, you can turn your attention to emotional balance. I don’t know of a tool that can help with this aspect of investing and planning. Rather, the idea is to find ways to stay cool when the markets are (or seem to be) crumbling around you, and to avoid giving in to the impulse to take action when every fiber of your being is screaming at you to do something, anything!

One way you might maintain your composure when most investors are all shook up is to remind yourself that not all market downturns turn into full-fledged routs. You could even take a few minutes to review instances in recent years (Brexit, the Greek debt crisis, fears of a slowdown in China’s growth rate) when many investors were convinced a market drop would lead to a major selloff but stocks recovered. If nothing else, this exercise could reinforce the notion that it’s foolish to try to outguess the markets.
And even if things get truly ugly, you might take a few minutes to recall the process you went through to arrive at your portfolio and remind yourself that you factored the likelihood of a significant setback into your decision-making when you settled on your asset mix. Indeed, the whole point of the exercise was to create a portfolio that you could stick with regardless of what’s going on in the markets and that, aside from occasional rebalancing, you wouldn’t have to re-jigger.

And while I wouldn’t go so far as to suggest you don’t keep track of economic and financial news, you certainly don’t want to follow it obsessively, especially if watching every tick of the market’s downward trajectory gets you so rattled that you’ll eventually cave in to the urge to abandon your long-term strategy.

That’s not to say you can never make a move. There may be times when you should. If, for example, it becomes apparent that you overestimated your appetite for risk when setting your stocks-bonds mix, then you need to re-assess and do some fine-tuning. But if you do make a move, you should do it calmly, rationally and as part of a well-thought-out plan, not in response to the latest dip in the market or on the basis of some pundit’s prediction of coming Armageddon.

Everything Looks Like A Bubble

My Comments: The article below comes courtesy of a writer by the name of General Expert.

He/she/they write extensively and appear on an investment news feed I follow called Seeking Alpha. You’ll have to draw your own conclusions about the message but I, for one, find it interesting and informative.

Here’s a link to the news feed: https://seekingalpha.com/author/general-expert.xml

Jun. 5, 2017

Summary

Calling the top is in fashion as the market makes new highs.

I see nothing in the market that is indicating a bubble.

Consumers are taking on more debt, but debt is essential for growth.

Consumers and corporations have no problems servicing their debts.

I see no reason why the Fed can’t keep interest rates low if there is a need.

Everything looks like a bubble… if you are a hedge fund manager that wants to protect your reputation or if you are a fearmonger that is just relishes schadenfreude on the off chance that everyone suffers.

I am never a mindless optimist, but I believe that we are currently experiencing one of the best economic environments since the financial crisis. Major indices such as the S&P 500 (NYSEARCA:SPY) and the Dow (NYSEARCA:DIA) are making new highs every week, but so what?

I believe that this is a testament to the economic strength of the U.S. rather than a reflection of the irrational exuberance of market participants. Today I would like to address two of the major arguments that I see being repeated again and again by bears, and why they are of no concern.

Too Much Debt

Consumers have been taking on more debt as the economy grew:
But debt isn’t bad. In fact, I would go on to argue that debt is great. Debt is what fuels economic growth. Part of the reason why recovering from a financial crisis is so difficult is because credit market freezes up and no one can take on debt to spend or to invest. But are we taking on too much debt? I believe that the answer is a firm “no.” As I mentioned in my previous article, consumers’ ability to service their debts is nowhere near pre-crisis levels.

Of course, a bear would say that this is all a ponzi scheme perpetuated by the Fed, which is keeping interest rates artificially low.

The Fed

The Fed’s dual mandate is simple enough: lower unemployment and stabilize prices. If these two objectives are achieved, it is likely that the economy will do well. The Fed took drastic measures (i.e. near zero interest rates) to stimulate spending during the financial crisis, and because interest rates are still low right now, bears are saying that the Fed is prolonging the inevitable collapse of the economy as the Fed can’t print money forever (both through QE and low interest rates to encourage lending). But why? I see absolutely no reason why the Fed cannot simply keep interest rates low for the foreseeable future if the economy is truly dependent on low interest rates.

What is a bubble? A bubble is something that is unsustainable. I would really like to be educated as to why the current regime could collapse at any time. Low interest rates have not caused rampant inflation contrary to the opinion of many experts, nor has debt spiraled out of control, neither at the consumer level (see previous graph) nor at the corporate level (below).

As we can see, interest coverage has risen far above pre-crisis levels, meaning our corporations have become less susceptible to shocks than before.

If the Fed can keep rates low forever then why bother with rate hikes and why should it unwind its balance sheet? While the Fed could keep interest rates low forever, it needs to proactively prevent the formation of bubbles. Because consumer confidence has risen since the election, the logical thing to do would be to offset this increase by enforcing a tighter monetary policy. The expectation of higher interest rates should allow corporations and consumers to make more level headed decisions. In my opinion this does slow down growth, but higher interest rates should reduce the volatility of the business cycle. Note that there is no reason to believe that the current level of spending is excessive, as evidenced by the low debt servicing ratio graph shown earlier.

Conclusion

I believe that the economy is in very good shape right now and any talk of a bubble is ludicrous. Neither corporations nor consumers are having any trouble servicing their debts. The Fed’s act of “printing money” is not harmful and I fail to see why low interest rates have to go away. While the Fed is raising rates, this is being done with the intention of offsetting rising consumer confidence. Even though higher rates may hamper growth, the Fed must make the safe choice in order to prevent the formation of an actual bubble, as opposed to the fictitious one that is often discussed in the media today.

Where To Invest

My Comments: There is a lot of fear these days about money. We all know that from time to time the markets experience a correction. Depending on how old you are and when you expect to use the funds you have, this fear is normal.

So how do you deal with it? Again, depending on your age and attitude about investment risk, you turn either to a trusted third party to make those decisions for you or you figure it out on your own. Or a little of both.

As a professional retirement income planner, I’ve got some experience with this question. But like everything else in life, I can only make an informed guess about the future. Here are some suggestions for you to consider.

By James Connington / Jun 26, 2017

With markets at all-time highs, investors are sitting on cash and struggling to decide how to use it.

The fear is that they will be investing at the worst possible moment, and face seeing investment values plunge if and when the market takes a downturn.
In Britain, seemingly unending political turmoil has been accompanied by a meteoric rise in the FTSE 100 index that many worry can’t continue.

When it comes to the US, neither active funds – which mainly fail to beat the market over any meaningful time period – or buying the incredibly expensive market, via an index tracker fund, look like appealing options.

Telegraph Money spoke to a selection of fund managers to help narrow some options that still offer a good balance between risk and reward.

All of these managers run multi-asset or multi-manager funds – all-in-one portfolios that contain a mix of shares, bonds, funds or other assets from a variety of sectors.

In theory, this should minimise the bias to a particular asset or region specialist managers may fall victim to.

Their picks include investment trusts specialising in property, European and Asian stocks, and the US energy sector.

Jacob Vijverberg, Kames Capital

Mr Vijverberg said he is less comfortable with assets that are dependent on earnings growth, such as regular stocks, because he thinks earnings expectations are too high.

Instead he highlighted global real estate investment trusts (Reits) as offering a good risk-reward balance.

A Reit is a listed company that owns and runs buildings to generate an income for investors.

Mr Vijverberg said: “We expect rates to stay low in the developed world, meanings Reits can continue borrowing cheaply. Additionally, rental contracts are generally linked to inflation, offering guaranteed income increases.”

He favours Reits that own properties used for logistical or industrial purposes, or hotels, rather than residential buildings.

In its multi-asset funds, Kames holds Tritax Big Box; this Reit invests in large warehouses and logistics facilities in Britain used by retailers such as Amazon. It charges 1pc.

Late last year, the Kames multi-asset team increased its investment in American Reits too, including Welltower, which invests in care homes and health facilities.

Welltower is listed on the New York Stock Exchange and is a part of the S&P 500 index. British investors should be able to access it via “fund shops” that offer international share dealing such as Hargreaves Lansdown and TD Direct.

John Husselbee, head of multi-asset at Liontrust

Mr Husselbee said that while stock markets continue to “shrug off” political events, “it’s hard to point to any sector that screams real value on a short to medium term view”.

He explained that diversification is therefore more important than usual, and so the best risk-reward proposition at present “lies in the developing markets of the Asia Pacific (excluding Japan) and emerging markets sectors”.

For Asia Pacific specifically, he said the region offers an “attractive and diversified dividend income”, which has value given many investors’ desperate hunt for income producing investments.

He highlighted Schroder Asian Income as one way to gain exposure, as it “provides a degree of safety in what can be a volatile market”. The fund charges 0.93pc and yields 3.5pc.

In the wider emerging markets sector, Mr Husselbee recommended Stewart Investors Global Emerging Markets Leaders. The fund charges 0.92pc.

Marcus Brookes, head of multi-manager investing at Schroders

Mr Brookes said European and Japanese stock markets offer better value than the US market at the moment.

This, he explained, is largely due to the lower valuations on offer, but also due to concerns that US company margins and sales “could be peaking”.
He said this would be a “worrying condition should the US experience an economic misstep”.

He explained: “In Europe and Japan we find relatively attractive valuations combined with margins and sales that are far from their peak.”

In his popular Schroder Multi Manager Diversity fund, Mr Brookes has around 6pc invested in the TM Sanditon European Select fund, and 4pc in the Man GLG Japan Core Alpha fund.

These charge 1.16pc and 0.9pc respectively.

Bill McQuaker, Fidelity

The US is the world’s biggest market, yet not all of its component sectors have been doing as well as the overall market.

Mr McQuaker picked out the energy sector as offering an investment opportunity.

He said: “The energy sector is down by around 20pc relative to the S&P 500 over the year to date, and would benefit from any rally in the oil price.”
This is something he views as likely due to global oil cartel OPEC’s extended production cuts, and the “overestimated” impact of US shale oil production on the global price of oil.

If you want to buy the whole US energy sector, BlackRock offers its iShares S&P 500 Energy Sector “exchange traded fund”.

The charge is 0.15pc, to track an index comprised of the S&P 500 stocks categorised as energy companies. Exxon Mobil and Chevron account for more than 40pc of the index.

The other option is a global energy fund that invests heavily in the US. Guinness Global Energy is often tipped by experts Telegraph Money speaks to. It is around half invested in the US, and charges 1.24pc.

Artemis Global Energy, Investec Global Energy and Schroder Global Energy are all between 40pc and 60pc US invested too.

A 60-40 Portfolio Could Return Less Than A Savings Account

My Comments: How fast will your money grow?

An expectation of growing money at an annual rate of 7% to 10% going forward is probably unrealistic.

Interest rates and inflation rates are relatively low, and global economic growth rates are likely to slow down over the next two decades. See my earlier posts to understand this: http://wp.me/p1wMgt-1Rp and http://wp.me/p1wMgt-1Qz

June 30, 2017 • Christopher Robbins

Over the next decade, the traditional 60-40 portfolio will post average lower annual returns than many online bank accounts do today, according to a web tool from Newport Beach, Calif.-based Research Affiliates.

A portfolio consisting of 60 percent equities and 40 percent bonds will post average annual real returns of just 50 basis points over the next decade, said Jim Masturzo, Research Affiliates’ senior vice president, asset allocation, on a Wednesday webcast.

“Investing is hard, and this market will kick you in the teeth,” said Masturzo. “The focus should be on how do we create portfolios well-positioned for the future that are able to meet our future spending obligations. For a majority of investors, risk is failing to meet their long-term spending needs.”

Masturzo explained that most of the firm’s assumptions lie on projections for 50 basis points of annual growth from large-cap stocks. The S&P 500 is projected to produce an average annual dividend yield of 2 percent and long-term earnings growth of 1.3 percent, but lose 2.8 percent in valuation annually.

By comparison, annual percentage yields of 1 percent or more are available in online savings accounts from Ally and Synchrony, and online checking accounts from Aspiration.

The low return estimate might come as a shock to some investors, admits Masturzo. In equities markets, earnings growth has failed to keep up with rising stock prices, while fixed-income returns will continue to be muted by low short-term interest rates and monetary tightening by central banks.

Yet a 60-40 portfolio had returned 4.9 percent net of inflation year to date through May 31, said Masturzo, with the Bloomberg Barclays U.S. Aggregate Bond Index yielding 1.2 percent, while U.S. large-cap stocks have returned 7.4 percent—a “spectacular rise in the markets.”

“The most common question we hear is: ‘Can this continue?’” said Masturzo. “I don’t know, but history tells us that it is unlikely.”

During the webcast, Masturzo used Research Affiliates’ newly updated Asset Allocation Interactive (AAI) tool to visually demonstrate the firm’s projections for future returns across asset classes, geographies and factors.

Research Affiliates predicts that there is a less than 1 percent chance that a traditional 60-40 portfolio will be able to post real returns of 5 percent or more over the next decade. The company assumes that the portfolio will generate a 2.4 percent average annual net yield, but an average annual valuation change of 1.9 percent.

A portfolio offering a 5 percent average annualized return is still possible, said Masturzo, but advisors would be better off optimizing returns through diversification and rebalancing than by adding risk.

Masturzo said that advisors and investors will have to think beyond traditional investments to generate yield and growth.

“Opportunities do exist beyond mainstream stocks and bonds to take advantage of asset classes with lower valuations or attractive cash flows,” Masturzo said. Yet most advisors are diversifying within highly correlated areas of the market and not across asset classes. Higher returns might be found in credit markets, commodities, REITs and private investment opportunities, and within non-U.S. markets.

Investors might also consider active strategies to produce differentiated returns, said Masturzo.

“Alpha is an important part of this discussion, especially when you’re talking about expensive asset classes,” he said. “We’re big believers in adding value through contrarian trading.”

At the heart of the tool is a scatterplot of risk and return demonstrating historical data or expectations from Research Affiliates projecting an efficient frontier defining a normal distribution around a portfolio’s probable returns.

The AAI tool is an interactive web tool that provides expected return data across more than 130 assets and model portfolios. The tool allows advisors to create and customize their own portfolios, or to blend existing portfolios to view expected and optimized returns and risk across five different currencies, and to discover correlations within their portfolios.

AAI also allows users to view cyclically adjusted price-to-earnings (CAPE) ratios across equity markets and compare them with each other, or compare current valuations against the historical range for each market.

During his demonstration, Masturzo used the AAI tool to show that, based on the Research Affiliates projections, increasing the volatility of a 60-40 portfolio by 14 percent by diversifying away from bonds and U.S. stocks is still not enough for it to reliably post 5 percent average annualized returns.

“Increasing volatility tolerance is a bad approach to achieving 5 percent real returns,” said Masturzo. “For those who want to do so, we believe you should approach a maverick approach to risk and add value beyond a passive approach by accessing contrarian advice within asset classes.”

When Will the Bull Market End?

My Comments: Be assured, I have no idea. But then, I don’t know what I’m going to have for lunch either. All I know is that I will have lunch and one of these days, this bull market will end.

The trick is to understand that it will end, and if you’re not ready to watch a ton of your money disappear, then you have to be ready. Some of you may have enough money that you really don’t give a damn. Good for you.

But if you worry about this, even a little bit, then you should talk with someone who has some answers. Someone you can relate to. I promise it won’t hurt much.

By Anne Kates Smith, Senior Editor @ Kiplinger, June 26, 2017

As the second-longest bull market in history makes its way into its ninth year, many investors are understandably asking: When will it end? We’d all be rich if there was a foolproof way to figure that out. But we can make some educated guesses.

One thing to remember is that bull markets don’t die of old age alone. Something’s got to kill them. And the surest weapon is a recession. That’s not always the case. There have been bear markets without a recession, as the crash of 1987 shows. But many of the worst downturns have been accompanied by a recession – or, more accurately, followed by one. The Great Recession that began in December 2007 was preceded by the start of a bear market in October of that year that went on to lop 57% off stock prices. The recession that began in March 2001 followed a March 2000 market peak that initiated a 49% stock decline.

False alarms are frequent, says economist and market strategist Ed Yardeni, of Yardeni Research. “The next bear market will start when the market anticipates the next recession – and turns out to be correct. The market has anticipated lots of recessions since 2008 that have turned out to be buying opportunities,” says Yardeni.

When recessions do pair with stock market peaks, they can do so immediately, as with the concurrent start of the recession and bear market of July 1990, or they can lollygag more than a year behind. On average, recessions begin 7.7 months following a stock market peak, according to market research firm InvesTech Research.

If we only knew when the next recession would begin. Well, Yardeni has a date in mind: March 2019. He bases his determination on the average number of months the economy has continued to expand after it has reached its previous peak, going back to the early 1970s. Counting from November 2013, which is when the economy finally surpassed its 2007, prerecession peak, Yardeni arrives at March 2019.

The date is not an official forecast, says Yardeni, who adds that it comes with no guarantees and plenty of questions. “What do we know today that suggests that March 2019 is a realistic date, or that a recession will come sooner or later? Right now, March ’19 looks realistic,” says Yardeni. “But if pressed,” he adds, “I’d say it might be later.” If the economic cycle sticks to the averages and if the stock market does, too – both big “ifs” – then investors should look for a market top around August of next year.

4 signs of recession

Sam Stovall, chief investment strategist at investment research firm CFRA, looks at four indicators when he’s searching for a recession on the horizon. Every recession since 1960 has been preceded by a year-over-year decline in housing starts, says Stovall. The dips have ranged from a 10% decline to a drop of 37%, and they have averaged 25%. The most recent report on housing starts showed a decline of less than 3%. “So we’re on yellow alert, not red,” says Stovall.

Consumer sentiment is another signpost. Before a recession kicks in, you’ll typically see an average decline of 9% in the University of Michigan’s monthly sentiment index compared with the previous year, says Stovall. Current reading: up 2.4%.

A drop over a six-month period in the Conference Board’s Index of Leading Economic Indicators means trouble, too, with declines of 3%, on average, registering ahead of an economic downturn. Latest six-month change: up 3%.

Finally, when yields on 10-year bonds dip below the yields on one-year notes – known as an inverted yield curve – look out, says Stovall. Ominously, long-term rates recently have been under pressure while the Federal Reserve pushes short-term rates higher. “We’re getting a flatter yield curve, but nowhere near an inversion,” says Stovall. His conclusion: No recession is in sight.

Before you fixate on the twin risks of recession and a bear market, ponder a third risk – exiting a bull market too early. The payoff in the final year of a bull market is historically generous, with returns, including dividends, averaging 25% in the final 12 months and 16% in the final six months.

Nonetheless, investors have every right to ratchet up the caution level at this stage of the game. Now is a good time to make sure your portfolio reflects your stage in life and your risk tolerance. Stick to a regular rebalancing schedule to lock in gains and maintain the appropriate balance between stocks, bonds and other assets, domestic and foreign. And whatever you do, make sure your portfolio is where you want it to be before you go on summer vacation next year.